Two new positions and thoughts on the recent sell-off in SaaS stocks
plus how to apply my framework of buying low
SaaS stocks have faced significant headwinds recently, and amidst this market reset, I’ve been hunting for specific opportunities.
The below Data from Avenir shows a clear divergence: while a broad basket of SaaS equities has declined by 27% since late 2021, the Nasdaq Composite has surged by more than 50% over the same period.
In my view, the sell-off has been mostly warranted due to increasing scrutiny of business models and practices like high SBC, as well as the perceived and genuine risk from AI. Furthermore, lofty valuations paired with slowing growth have created a challenging environment. This is not a good combination.
However, I believe this sell-off has created an opportunity. It is time to identify the best SaaS companies: those that will compete with AI natives to become systems of context and unlock agentic value.
As it relates to multiples, SaaS valuations have on the whole retraced the 2019-2021 period, making current levels look somewhat compelling at last.
However, the recurring issue with many of these names is the lack of GAAP profitability. Frequently, free cash flow is driven almost entirely by stock-based compensation, as seen with companies like Atlassian (TEAM) and Rubrik (RBRK). This is compounded by management teams that often remain reluctant to reduce their reliance on SBC.
The Companies I am watching
The table below includes names that I believe are worth watching. This is not a complete list, and there are many other high-quality companies such as SAP, NET, ZS, PLTR, MDB, SNOW, and TWLO that may be considered.
Below, we will examine the two new positions I purchased today and the reasoning behind these investments.
